Tuesday, December 28, 2010

What “A Spending Problem” Means

Russell Long of Louisiana, son of the more notorious Huey Long, is famous for having said, “Don’t tax you, don’t tax me. Tax that fellow behind the tree.”

Mr. Long was no stranger to tax laws, having served as Chairman of the Senate Finance Committee for several years from 1966 to 1981, after which Republicans assumed control of the Senate. The prominent Democrat was an unashamed proponent of tax breaks for businesses. “I have become convinced,” he once said, “you’re going to have to have capital; if you’re going to have capitalism.” At the same time, he was somewhat wary of “tax reform” which, to his way of thinking, involved a certain amount of political subterfuge: “Don’t tax you, don’t tax me. Tax that fellow behind the tree.”

In Connecticut, the fellows behind the tree are thought to be capitalists “millionaires” earning more than $250,000 per year, most of them quartered in what we have come to call the “Gold Coast.” It is no surprise that “millionaires” in the United States have been down graded since the sixteenth amendment establishing the tax was ratified in 1913, at which time the top tax rate was 7% on incomes above $500,000, about $10 million in 2007 dollars. During World War I, the top rate rose to 77% while the income threshold that deposited millionaires in the top bracket rose to $1,000,000 or $16 million in 2007 dollars. Following the war, the top rate was reduced to 24% and the income threshold for paying this rate fell to a low of $100,000 or $1 million in 2007 dollars. But over time the tax was more broadly levied to include the proletariat. Begun as a tax on millionaires and multi-millionaires, the income tax eventually ended as a tax on pastry cooks and hairdressers. We are the future mysterious fellows behind the tree.

Almost everyone in state government, with the possible exception of Speaker of the House Chris Donovan, has now become convinced that Connecticut has a spending and not a revenue problem. Such was the buried assumption in most Democratic campaigns in this the winter of our discontent.

On Sunday the Hartford Courant, whose editorial page editors several years ago reminded us that the state had a "revenue not a spending problem," repented in sackcloth and ashes, courageously advising legislators in a sprawling 1,400 word editorial, “Agenda: For The State” to -- STOP SPENDING MONEY.

“’The spending cuts have to come, and they have got to be huge,’ says former Gov. Lowell P. Weicker Jr., who solved the state's billion-dollar deficit 20 years ago by instituting a state income tax. ‘It certainly has been spent,’ he says."

Key to understanding the obvious and direct correlation between getting and spending is this golden perception: If you don’t tax it, you can’t spend it.” Its destructive corollary is: If you “solve” a spending problem by raising new revenue, it will not be long before the revenue is spent, producing – this is not rocket science – more debt and, shortly following, more and higher revenue increases. This is how dangerously red permanent budget holes are dug. Given the dialectic “more revenue raising leads ineluctably to more spending,” one may question whether Mr. Weicker’s solution “solved” the state’s deficit, which today is many times larger than it was during the first golden days of Mr. Weicker’s one term administration. When Connecticut’s editorial pontificators grasp the causal connection between getting and spending, their conversion may be complete.

The sorrowful truth is that Connecticut has run out trees behind which may be found mythical taxpayers. The recklessly destructive spending spree that followed the Weicker income tax, and the bottomless abyss of federal spending that has followed the current deep recession, have emptied the forest of hiding spots: There is no painless way to spend money and hand off the bill to the quarter-millionaires Donovan and others suppose will pay it.

Connecticut’s state debt, not counting the state’s massive pension liability, amounts to about $3.5 billion for each of the next three years, which means that Connecticut must reduce its spending by a like number – PERMANENTLY.

But the prospect of permanent reductions in spending have had in the past the same effect upon leaders in the state’s Democratic caucus that water had on the wicked witch of the West in The Wizard Of Oz. And it is very much an open question whether Governor-elect Dan Malloy can convince such leaders as Donovan that the dissolution of the state awaits those who lack the necessary mental and emotional skill set to appreciate the problem and its ONLY sound solution -- STOP SPENDING MONEY.